by 25 basis points to 10.75 percent reflecting concerns over rising inflation and debt. The move surprised the market which had expected rates to stay on hold.

Cash-strapped Serbia is under pressure to bring down its debt to reassure investors, and repair damaged relations with the IMF, as financial markets have been rattled by the government's expanding deficit at a time when the economy is shrinking on the back of falling demand from key trade partner the euro zone.

Serb inflation rose to 7.9 percent in August from 6.1 percent in July. The dinar

was 0.1 percent firmer shortly after the rate decision.

Neighbouring Hungary, where markets are pricing in further monetary easing to help the recession-hit economy after two rate cuts in the past two months, sold 60 billion forints ($275 million) worth of three-month bills at an auction, which received strong bids.

A fixed income trader said that remarks by Prime Minister Viktor Orban on Tuesday that Hungary could make do without an IMF deal even in 2013 had no market impact.

Hungary's government launched a media campaign on Tuesday saying it would not " g ive in to the IMF" , j ust weeks before Budapest hopes to resume talks with lenders on a financial safety net to bolster its shrinking economy.

"The session is relatively quiet, liquidity is low but buyers have been in a majority over the past days, especially around the middle of the (yield) curve," the trader said.

Uncertainty over the IMF talks, as well as euro zone concerns have weighed on the forint

this week, with the unit bid 0.3 percent lower at 1015 GMT, while the Polish zloty

was down 0.2 percent.

Polish yields were broadly flat, with five-year yields close to all-time lows hit at the beginning of October.

"There will be rate cuts so yields must fall," said Pawel Bialczynski, a fixed income dealer at BRE Bank. "We are before a cycle of cuts and it is natural that short- and medium-term yields are so low."

But dealers said that developments on the euro zone's debt crisis were the main driver of sentiment across the region on Tuesday.

Ministers meeting in Luxembourg have dampened any hopes on markets of a swift move by Spain to seek more international aid.

The Czech crown

was up 0.1 percent after September inflation data was in line with forecasts at 3.4 percent.

Roman Fol, an FX dealer at Raiffeisenbank, said he expected the crown would move within a range of 24.85 and 25.00 per euro in quiet trade on Tuesday.

"The euro zone ministerial meeting has not brought anything new and Europe is in a vicious circle of negotiations," he said.

The IMF said in its bi-annual report that the global economic slowdown was worsening and cut its growth forecasts for the second time since April. It expects growth in central and eastern Europe to more than halve to 2.0 percent this year, from 5.3 percent last year, and rise to only 2.6 percent in 2013.